The headlines all say that the Bank of England has pumped another £50 billion into the economy in the third round of quantitive easing. In fact, the money will not get far into the economy. It is given to the banks and other financial sector companies, and evidence from the previous £250 billion worth of quantitive easing is that almost all of it will stay there, being very handy stuff with which to fund massive salaries and bonuses.
This whole notion of what is and isn’t useful in the economy is strange anyway. This cold weather is making us all use a lot more gas for heating. Those higher bills will count as increased economic activity and higher GDP, but actually we are all less comfortable. This morning I have put on an electric heater to boost the central heating. That is increasing economic activity and increasing GDP. But for the last week I have been burning logs from my own garden on an open fire – that doesn’t increae GDP as I didn’t pay for them. But they were warmer and more pleasurable. A homely example that the automatic equation of GDP with a better life is nonsense.
There is a mystery about the way Q.E. works. The Bank of England does not just give the cash away to financial institutions, but exchanges it for assets. We are told that this is not the Bank of England saving the bankers from their mistakes by buying up toxic assets, but rather that the assets are gilts.
I do not understand this at all. Why would banks want to cash in gilts? Gilts are already perhaps the most liquid asset you can hold, other than cash, in the classic definition of liquidity that they can be easily sold without much affecting their value. On top of which, these same financial institutions are actually still buying bonds from the Bank of England on a regular basis, which would make the process pointlessly circular. And the current Bank of England bonds the banks are buying pay historically low rates, almost certainly lower than any gilts they are exchanging under Q.E.. Why would they do that?
The only sense I can see is that the Bank of England is giving cash in return for junk, and the gilts line is a cover. Any genuine official statistics on exactly what the Bank of England has bought up under Q.E.anywhere?
It is beyond doubt true that the effect of creation of new money is to reduce the value of currency already in circulation. The effects will show through in inflation and the exchange rate. Of course, those will continue to be affected by other factors as well, which is why there are better and worse times to do it. But in effect Q.E. is still a transfer of wealth from those who hold any of the currency to those given the new stuff. In other words, more cash from you to the bankers.
Actually if QE had been used genuinely to stimulate the economy it would have been a marvellous thing. With £350 billion we could have built an enormous amount of social housing on brownfield sites, converted derelict high streets into housing, built the Severn barrage and a high speed rail link from London to Aberdeen and still have had change. We could have reopened the steel industry to do it. a thousand manufacturing firms could have been re-tooled. Millions could have been employed. The entire logic of economic depression could have been turned around.
Instead we gave more cash to the bankers.
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The problem appears to be that the right sort of individuals* in the private sector are not receiving money supply to spend and generate relief and energise economies, CanSpeccy. Thus are the banks destined to collapse and their executives fated to be considered and treated as ignorant and arrogant pariah/negligent, artificial control freaks?
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* And I particularly choose the word individuals because money/QE spontaneously created wealth is always held in the control of individuals even whenever disguised and gifted as a loan/bail out to a multinational conglomerate.
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Whenever one considers the supposed parlous state of Westernised capitalist/mercantilist economies, with their mountains of ever increasing debt and pretty clear inability to repay, [and one then should be asking …. Repay to whom and for what whenever money is so easily instantly invented in sums as are merely arbitrarily decided/subjectively considered appropriate for systems survival needs/feeds/seeds] is one forced to conclude that the Game being played is systemically sub-prime and failed, and failed a long time ago, with no one smart enough to start a completely different and fundamentally new Great Game.
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And that is a catastrophic failing in human intelligence which delivers every conceivable vulnerability to be ruthlessly exploited by that which delivers ……. well, would that be the Future with SMARTer Immaculate Sources or those who would be ITs Agents of Change?
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And why not, Craig, for it covers up for so much and provides such remarkable stealth too, in some cases.
Sorry I spoke 😉
Knocks on the door in the chilly dawn this morning.
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Eight people held over payments inquiry
Five employees of the Sun were among those arrested as part of the Operation Elveden inquiry
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Five Sun employees are among eight arrested over alleged corrupt payments to police and public officials.
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A Surrey Police officer, member of the armed forces and Ministry of Defence employee were also arrested.
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Picture editor John Edwards, chief reporter John Kay, chief foreign correspondent Nick Parker, reporter John Sturgis and associate editor Geoff Webster were held, the BBC understands.
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The arrests are part of the Operation Elveden probe into payments to police.
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News Corporation confirmed that five employees of the Sun were arrested.
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http://www.bbc.co.uk/news/uk-16996275
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Shame that there isn’t an Operation FoxGouldWerritty ongoing.
Absolutely love it. A heated debate trying to understand the intrecacies of an unsustainable and falsifying financial system, turns to semantics over words.
Clark I’m all the way with you, what point has pedantry got, what has it ever achieved and why are we all so hung up about words when languages evolve all the time.
Unless 70% of all Bretton woods orientated fiancial system fail, we will not see anything different. Off course if we help this failure along to happen faster, rather than drag it out for some more decades of value adding wars and crumbling social system, we will be called just about every word under the sun, including the word eco/terrorists.
Craig, I don’t think you underdstand how QE works. There is no reason why the Bank of England should buy gilts, it is just that they are more liquid than any other UK asset. What matters is how the Bank pays for them, which is with an IOU.
This IOU counts as money and so the money supply is increased. It also counts as part of the reserves that banks have to hold and allows them to lend more money (more than 10 time the amount of QE).
Unfortunately, the banks are unwillin to use this increased lending capacity and so the effect of QE is rather limited.
The right wingers here are so desperately trying to portray the fraud of the gargantuan magnitude perpetrated on the ordinary masses by the ruling oligarchs as a natural/normal economic activity.
Found this
http://www.wsws.org/articles/2012/feb2012/food-f09.shtml
james c,
Gilts are the “IOU” given by the BOE to some entity in the past with a set coupon value ie rate of return, that in turn has given the BOE to print/issue/hand out money.
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Evidently as per the sophistry so prevalent on this thread the BOE without raising any money ie not issuing any gilts, or bonds goes ahead and prints money to buy back its IOU that it has given in the past, with a view to the banks lending money to people who have no jobs and not a chance of a snow ball in hell to pay back the money they have borrowed from the said banks and then blame is put on the banks for not lending out to people who cannot pay back the amounts they intend to borrow.
The very fact that there can be so much argument with so little agreement, so much misunderstanding, so much disagreement over what the various terms even mean, let alone their implications, seems indicative that economics has got completely out of hand, that it now has more in common with, say, astrology, fashion and connoisseurism than it has with any kind of science.
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Now what sort of organisations routinely submerge important discussions under a deluge of confusion and trivia, and why?
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It’s perfectly simple. People get together to make democratic governments partly as a tool that is powerful enough to keep other, less regulated power structures in check. One governmental function is to gather wealth from where excesses of it accumulate, and move it to where it will actually do some good. Seeing as the distribution of wealth has been steadily polarising for decades, governments are clearly failing in that function. The obvious reasons for this are corruption and the undue influence of Big Money over government.
The 0% stamp duty ‘holiday’ for houses sold for under £250,000 is being withdrawn by Osborne. From 24 March it returns to 1%.
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New deals for buyers as stamp duty holiday ends
http://www.bbc.co.uk/news/business-16989215
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This insurance scheme is being introduced.
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‘Next month another initiative is being launched.
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Under the NewBuy Guarantee scheme, lenders will be able to offer 95% mortgages on new homes without taking on all of the risk if the borrower defaults.
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This insurance scheme will mean that lenders will be guaranteed to lose less money than before if the borrower eventually fails to repay all their loan.
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A spokesman from the Department of Communities and Local Government explained how it would work.’
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I hope the ‘first time buyers’ understand all of this jargon.
All this angst over QE and other arcane facets of global mirage finances may become academic if Greece defaults. If the nations of Europe (and by extension the world) are threatened by black holes of debt, then it would seem logical that these debt sinks must simply be cancelled and a pre-designed model of sane balance sheets erected in their place. If the truth is that the banks and other institutions have no foundation in reality, other than the berzerk endgame of a virtual pyramid of utterly fanciful derivatives, then we would be perfectly justified in creating a financial reality which works.
Since we can be pretty sure that the banks are going to get a sweet deal from the “QE”, perhaps the term “buy” is being used only because we rubes wouldn’t understand complicated financial concepts like “hypothecation”.
Now, if the bonds were merely hypothecated as security for the QE loans, the banks would still have them on their books as Tier 1 capital and would continue to receive interest payments on the bonds. Now that would be a sweet deal, wouldn’t it?
Mike
Simply wrong, I’m afraid. QE doesn’t “give money” to banks and financial institutions. There are genuine stats out there which indicate clearly that the BoE does indeed buy gilts, mostly from institutional investors rather than banks. It is able to do so because investors are willing to sell, either because they can put the money somewhere equally safe for a low return or because they can invest the money in something that gives a higher return.
The stats you want are quoted in Chris Dillow’s blog http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/02/qe-and-banks.html
He provides a link to the source of the stats at the end of the blog.
QE is intended to counteract deflationary tendencies in the economy. Broad money (M4) is falling because the private sector is paying down debt and not borrowing. People are saving instead of spending, businesses are hoarding instead of investing. QE props up the money supply and boosts spending in the economy through various channels with the intention of keeping inflation close to the MPC’s 2% target. The MPC is expecting a serious fall in domestic inflation this year, and they have started QE in anticipation of this. It remains to be seen if they are right – and if QE is at all effective. Personally I think QE is a pretty weak stimulus and I’m not sure it makes a lot of difference.
QE seems to have little effect on the exchange rate, but there are so many other factors at work that it is hard to tell. QE in theory devalues the currency, but when the economy is deflating, the devaluing effect of QE should help to hold the exchange rate steady (deflation tends to cause currency appreciation).
I agree with you that direct fiscal stimulus would be more powerful. But as with all powerful tools, it carries serious risks and is open to abuse.
[Mod: Trimmed…]
I am a tremendous admirer of the courage and outright honesty of Craig Murray. I have posted my utter admiration for him on this site. But that doesn’t mean that I cannot make fun of him when he misspells a word and then somewhat pathetically defends it as a new word that he has invented. We all make mistakes and humour is the best healer.
[…]
Frances Coppola,
Do you live in UK?:
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People are saving? Businesses paying off debts? Deflation?
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The food prices are rising, energy prices rising, in fact the only falling price rates are; interest rates, to discourage any saving, and push the money into the Stock Markets so that the the rich an offload their junk bonds and get their money before the prices nose dive.
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The basic facts the are; BOE buys low yield gilts and pumps out even more money to devalue the currency. the devaluation then leaves the oligarchs to either;
a- join the Euro based on the parity of unity. ie one pound is equal to one Euro.
b- On the other hand with the depressed wages and living standards, UK then compete with China.
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Trouble is neither option can work out, because Euro itself is going through a rough patch, and Japan has been dealing with stagflation for decades, and as yet it is not as competitive as china. although Japanese elderly can look forward to getting abused and kept hungry and in pain because there is not enough funds left in the family to feed these or take care of their medical needs. Therefore the latest health-care bill in UK is setting that scenario up too.
Clark: Your 1.20 pm post is spot on about economics; I’ve seen the subject helpfully compared to alchemy rather than chemistry, a magic art driven by obsessive idealised goals – “gold”, “the free market” – rather than a science that grows in accuracy and sophistication as theories are subjected to rigorous tests or mose productive hypotheses formulated.
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As for your 11.48am mention of spell-checkers, when I tried to type out “My love is like a red, red rose”, Microsoft barged in with “Reduplicated word”.
Well said, passerby, and soon these high prices will reflect themselves in the perfect storm, all it takes is a concerted attack. To alleviate stagflation japan had to conentrate of self sustaining society, something we are really crap at, whether its on the alternative energy sector of with safeguarding future food supplies. I would advocate limited protectionism, guranteed percentage take up of British food stuffs by retail outlets, any ‘busting’ of regs should be heavily fined, they should not be able to [put farmers up against the wall, they have one of the highest suicide rates, still.
Sorry to re-poste but this made my day.:)
http://www.aljazeera.com/news/americas/2012/02/2012210205218401882.html
Off Topic : Greece bailout no2.
Given want currently going on with the new bailout, I’m surprised no-one has aired a comparison which shows what would have happened to Greece if they had walked away from Bailout No1 and the EU.
I cannot believe it would be worse that the current shenanigans?
o/t
Syria is now……Iraq
http://www.businessweek.com/news/2012-02-11/gunmen-kill-syrian-general-day-after-aleppo-suicide-bombing.html
Shades of Farouk?
http://www.emptywheel.net/2012/02/11/why-has-the-government-story-about-who-ordered-the-undiebomber-to-attack-the-us-changed/#comments
TFS,
Look at the Iceland, there a wholesale change of constitution and a whole new way of governance is emerging, with the old oligarchs on the run from a plethora of fraud and embezzlement charges.
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Greeks will have no alternative soon, yet they would have taken on even more debts which were foisted upon them to pay the interest on their loans.
[Mod: this reply to a deleted comment was left because it’s funny.]
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Am I the moderator? No my friend , I am a pile of encrusted pigeon poo. Very good for the scalp, leaves it red and raw and the hair re-grows thick and strong, just like the recession. Would you like to buy a bottle of Tory-Thatch-n-Thrive 25 guineaus a throw? Or try a free sample size bottle by leaving your email address below.
Permanent scalp shine guaranteed.
War, Economy and the State – the eloquent Peter Joseph back from Israel.
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http://www.youtube.com/watch?feature=player_embedded&v=mmMrx-yhaIA
It’s said that astrology was invented in order to make economics seem respectable. I know it was said of psychiatry that it produced more theorems in two decades than mathematics in three millennia – economics seems of the same sort, with nothing ever rigorously proved or disproved. It seems merely a flexible structure of justifications for whatever a government wants to do while behind all the pseudo-science and flummery the real world falls to bits. ‘Economics’ is probably just a means of obscuring the fact that simple political judgements have been made, and could have been made otherwise.
The BoE does publish what it’s doing: http://www.bankofengland.co.uk/markets/apf/apfgiltresults120201.pdf is a list of what Gilts they bought & for how much. And yes, it does create money out of thin air – see its Assets (Gilts they bought) & Liabilities (notes in circulation, among others – http://www.bankofengland.co.uk/publications/bankreturn/2012/120208cs.pdf) jump when they started QE this year: http://www.bankofengland.co.uk/markets/images/liabilities_assets.jpg
Craig;
Is there a moderation limbo keyword(s)?
Ben Franklin, there is no keyword filtering. A comment of yours and a duplicate were queued automatically by the software because they contained links. Comments with just one link usually appear immediately, but sometimes even a comment with no links gets queued; we don’t know why. I approved the comment and deleted the duplicate. Other comments have been deleted or trimmed because a personal spat was cluttering this thread.
O/T Young Uzbek man faces 30 years in prison for threatening to kill Obama. He fell into a trap when acquiring a weapon. A set up?
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http://www.bbc.co.uk/news/world-us-canada-16992861
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‘A witness said Kodirov contacted an unnamed person, who became a government source, and bought a Sendra M115A1 automatic rifle from an undercover agent on 13 July.
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The agent also provided Kodirov with four hand grenades that had already had the powder removed from them.’
Leo: when I came back from “War Horse” (better than I had exoected) I was rather disappointed to find that your earlier posting addressed to me about speaking Chinese had either been deleted or trimmed out of recognition. I’ll still make the point that while I enjoy being able to speak Chinese I am far from proud of my level of competence. I make a small vocabulary go quite a long way; but I know many people whose Chinese is far better than mine, as well as some who speak several variant like Cantonese and Shanghainese while I’m restricted to Mandarin.
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Your rather miserable tone suggest that you may be a mangy lion who mistook a parcupine for his wife’s hat and tried to take a swipe at her head. The quills are painful; but you’ll just have to wait until a friendly mouse comes along to help you. Good luck.
Mary,
This publisher in an editorial urges Natanyahu to send a Mossad hit team to assassinate Obama, and only apologises.
Yes you are correct. What he said is apparently a crime in the US so he should have been charged.
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He has since resigned and put the rag up for sale/Wikipedia Atlanta Jewish Times. I have a friend in Atlanta. I will ask him about this character Adler.
http://www.huffingtonpost.com/2012/01/24/andrew-adler-atlanta-jewish-times-obama_n_1228538.html